Reverse mortgage borrowing limits

Part II of HSH.com's comprehensive guide to reverse mortgages and home equity conversion mortgages (HECMs) offers clear information about how much you can borrow, a credit score's impact on your loan, and other technical points. All articles are intended for a general audience and information is presented in straight-forward terms.

How much money can I get with a reverse mortgage or HECM?

How much money you get out of your home depends on whether you get a private market reverse mortgage or a federally-insured HECM. If you want a HECM, the maximum amount you can obtain is constrained by the median home price in the area where you live, but the absolute maximum amount you can receive is $726,525. If you have a high-value home in an expensive area and need access to equity amounts above these local limits, you may be better off pursuing a private market reverse mortgage.

These private offers are sometimes called "jumbo reverse mortgages," and while they may generally follow HECM guidelines, the lender is free to set terms and conditions, so you'll need to carefully evaluate offers to see that they meet your needs.

For HECMs, the amount of money you may borrow depends on:

The age of the youngest borrower or eligible non-borrowing spouse

The loan's current interest rate

The lesser of the appraised value of your home, the HECM mortgage limit in your area, or the actual sales price of your home.

The Department of Housing and Urban Development, HUD, sets a "Maximum Claim Amount" (MCA), or maximum loan amount, for FHA-backed loans (including HECMs); this amount is set for each county in the U.S.

For HECMs, the MCA is either the appraised value of your home or the FHA maximum insurable loan limit in your county. You can find the maximum amount available in your area with a HUD tool.

Reverse mortgage home appraisal

To determine your home's value, your lender has an appraisal performed on the property. The appraisal determines not only the property's current market value, but also identifies any repairs required to bring the home up to a satisfactory condition. This condition isn't determined by your lender, but rather by a set of regulations enforced by HUD.

If there is more than one borrower and no eligible non-borrowing spouse, the age of the youngest borrower is used to determine the amount you can borrow.

Calculating your reverse mortgage maximum

The MCA is the "gross amount" you could potentially borrow. However, you are not generally permitted to borrow all of it. A percentage factor based on the age of the youngest borrower (or non-borrowing spouse) is applied against the MCA, which reduces the available amount by a given percentage. The residual amount that comes from this initial calculation of MCA multiplied by the percentage factor is called the maximum Principal Limit (PL).

For example, let's say that your home is worth $100,000, the youngest borrower or eligible spouse is 62 and the interest rate is 5 percent. Your home value is below the maximum for the area and so is below HUD's limit. The factor for the youngest borrower (age 62) is .524, meaning that 52.4 percent of the $100,000 ($52,400) is the gross amount of are funds available for the HECM. This remaining value is your maximum PL.

Note: For the purposes of calculating the principal limit, the expected rate for all HECMs has a floor of 5.0%, regardless of whether the loan has a fixed or adjustable rate. Learn more about how interest rates on HECMs are set in the "Technical Stuff" section of this guide.

Finding out the Principal Limiting Factor for your situation can be a challenge. To make it easier, we created a PLF Lookup Tool (just below). If you have a sense of the current value of your home -- or if you think it is at the MCA for your area, you can use that figure and the PLF factor to reckon your Principal Limit.

The principal limit that you can borrow is the Maximum Claim Amount for your area multiplied by the youngest borrower's age factor. This is actually the gross amount available for your loan, not the amount of money you can actually utilize.

The actual, final amount - called the Net Principal Limit (NPL) - includes deductions for Mandatory Obligations, the amount of any required repairs to the home, and possibly a Life Expectancy Set-Aside (LESA) from the proceeds. LESA is the amount of your equity reserved for paying certain future expenses.

Curious about take-outs and set-asides? The next article in Part 2 of this guide delves into the details.